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Microsoft Profit
In First Quarter
Increased by 11%

Microsoft Corp.
reported an 11% jump in first-quarter profit, propelled by strong sales of software for personal computers and servers.

But the company said that a closely watched measure of demand for new multiyear software contracts was down more than expected, raising questions over the strength of spending by large corporations on Microsoft's core products.

For the fiscal quarter ended Sept. 30, Microsoft reported net income of $2.9 billion, or 27 cents a share, including an expense of five cents a share for an employee stock compensation program. In the year-earlier period, Microsoft earned $2.61 billion, or 24 cents a share, including a six-cent expense for equity compensation. Microsoft said revenue rose 12% to $9.19 billion from $8.22 billion.

The results topped average analyst forecasts reported by Thomson First Call, which had estimated earnings of 30 cents a share, excluding the equity compensation expense, on revenue of nearly $8.99 billion. Excluding the equity compensation expense, Microsoft had profit of 32 cents a share.

"We're performing very well against the overall technology industry," said John Connors, the company's chief financial officer.

Microsoft's shares traded at 4 p.m. at $28.56, down 14 cents, on the Nasdaq Stock Market. In after-hours trading following the announcement, the stock was trading at $28.17.

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Microsoft's earnings show how sales of personal computers help bolster the company despite still-slow business spending on technology. The results follow a mixed-bag of earnings announcements from other technology industry bellwethers including
International Business Machines Corp.
, which this week reported solid quarterly earnings and issued a bullish forecast for technology spending this year.

PC demand powered sales of Microsoft's two most important product lines, the Windows operating system and Office suite of software applications. World-wide sales of PCs in the quarter grew 12% over the previous year, according to a survey this week from market researcher IDC, surpassing Microsoft's 6% to 8% growth projections.

Revenue in the Windows group reached $2.99 billion, up 7%, while profits hit $2.39 billion, a 6% rise over the previous year, as businesses and consumers upgraded to the Windows XP operating system.

A highpoint of the quarter was Microsoft's server business, which the company said recorded a 19% rise in sales to $2.24 billion from $1.88 billion in the same quarter a year earlier. Profits in the group reached $701 million, an 84% rise from $381 million a year earlier.

The strong results of the server group are a good sign for Microsoft's full-year growth and its efforts to try to contain the spread of the rival Linux operating system, which has growing share of the server market.

But analysts were concerned with a drop of $395 million in deferred revenue from the quarter ending June 30, larger than many analysts' forecast of as much as $250 million. Microsoft, like many software makers, books deferred revenue when it signs a long-term contract and recognizes it over the life of the contract. Drops in deferred revenue can be a sign of weakness in new bookings by large companies.

Mr. Connors said that some contracts Microsoft had expected to book in the quarter were delayed, in part due to a 90-day grace period built into the contracts. He also said that a large number of new bookings in the quarter were midsized businesses that didn't sign up for the multiyear agreements and instead bought software with one-time licenses.

Mr. Connors emphasized that new contract bookings are strong and that Microsoft will make up for the delayed bookings in the full year. "It's really not a big deal," he said. "What matters is the year-end and what matters is the underlying booking trends."

The company raised its forecast for earnings per share in the 12 months ending next June to a range of $1.07 to $1.09, compared to a forecast in July $1.05 and $1.08.

Microsoft also raised its revenue forecast for the year to a range of $38.9 billion to $39.2 billion, up from its previous estimate of between $38.4 billion and $38.8 billion. By comparison, an average of analysts' estimates by Thomson First Call forecast full-year sales of $38.93 billion.

Mr. Connors said that sales of Microsoft's Xbox videogame console helped lift sales at its Home and Entertainment unit 9% to $632 million. He added that cost efficiencies in manufacturing the Xbox helped pare losses in the group to $142 million from $273 million in the same period a year earlier.

Microsoft's online business, MSN, which posted its first full-year profit in the year ended June 30, continued to benefit from broad growth in online advertising. The unit posted an operating profit of $77 million, up 35% from the year-earlier period, on revenues that increasd 10% to $540 million.